Articles

Client Alert - Delaware Supreme Court Decision Puts Boards on Notice Regarding Duty to Review Risk

Date: August 6, 2019
A recent Delaware Supreme Court decision has put boards on notice of their duty to review the risks facing their companies, regularly review, monitor, and oversee those risks, establish reporting systems from management to the boards, and fully document those efforts in minutes and board materials.  Failure to do so can expose a director to personal liability. 
 
In Marchand v. Barnhill, which involved Blue Bell Creameries USA and a deadly listeria outbreak in its ice cream products, the Delaware Supreme Court reversed the dismissal of a shareholder derivative case brought against a board of directors for failure to oversee a key operational risk for the company, in part because such oversight and monitoring was not documented in meeting minutes.  
 
In overturning the trial court’s dismissal of the claim, the Supreme Court found the complaint to be sufficient where management possessed information that identified food safety and contamination risks facing the company, but the Board seemingly failed to implement a compliance and monitoring system to oversee or become knowledgeable about those food safety concerns.  Importantly, the Supreme Court of Delaware noted the absence of any discussion of those risks in board meeting minutes or board meeting materials.  The board’s failure to document its oversight of the known risk was a contributing factor for the Court in overturning the dismissal of the cause of action for breach of the duties of good faith and loyalty owed to the company. 
 
Key Takeaways from Marchand v. Barnhill
 
  • To demonstrate proper governance for addressing company risks, a board should implement systems reasonably designed to identify risks facing the company and its operations, and establish regular monitoring of those risks through a documented reporting policy to the board. 
  • A board should document its compliance with monitoring and oversight of risks in meeting minutes and other meeting documentation on a regular basis.  Failure to do so can expose a director to personal liability.